State-owned Enterprises Governance And Firm Value From The Perspective Of Government Control

Bankruptcy of Lehman Brothers Company triggered a global financial crisis on September 15th 2008 once again. The financial crisis led to an intervention on the market economy from the government. Thus, for all kinds of social problems or economic problems, the government as a key factor has to be considered. Although the non-state economy continues to grow since 1978, the state-owned enterprises (SOEs) has always occupied a considerable proportion in the national economy in China, especially the vast majority of listed companies are SOEs controlled by the government. Therefore, the discussion of government control of state-owned enterprises has important practical significance.SOEs reform has gone through various stages, from the initial "decentralization" reforms, expansion of the operational autonomy of enterprises, establishment of capital market to overcome the financing difficulties of SOEs and corporate governance, "grasping the large and letting go the small" and "strategic adjustment" strategy, to the ongoing establishment of a modern enterprise system and state-owned assets management system reform. As a whole, the overall reform strategy is constantly evolving. At present, the SOEs reform has been on the system innovations and restructuring. Although a large number of SOEs have established a corporate governance model based on modern enterprise system, low operating efficiency of SOEs still have not been fundamentally resolved. Why the modern corporate governance model does not play its proper role in SOEs? What role should the Government play in corporate governance? These issues are worthy of further study. Due to the lack of specialized state-owned assets management institutions, there had been a great number of problems in SOEs before 2003, such as "the functions of the government and enterprises mixed up", vacancy of the investor, and insider control. Thus, SOEs reform of property rights' may often be accompanied by the loss of state assets. As a result, the reform did not fully reflect the government's strategic motives. The State-owned Assets Supervision and Administration Commission established in 2003, which means that the problem of investor absence is resolved partly. In addition, SOEs' corporate governance mechanism would reflect the government's aspirations and motivation to some degree. To better study these problems, the research period will be on 2003 and beyond.Scholars has proposed "the hand of support" (Musgrave,1959; Stiglitz,1989) and "the grabbing hand" (Shleifer and Vishny; 1998) theoretical model from different assumptions. Meanwhile, "the hand of support" assumes that the Government's goal is to maximize social welfare, so that market failure problems can be solved, such as monopoly pricing, externalities, unemployment, inadequate credit. "The grabbing hand" assumes that the objective pursued by the government is to maximize their own self-interest. It also suggested that politics should be taken fairly, because political process is the decisive factor of government action. Moreover, it believed that politicians often used their economic control right to achieve personal political or economic objectives, such as the allocation of resources to political supporters and upholding their own political status. Although the two conflicting theoretical models have different starting point, it can be seen that they are from the static view and ignore the institution changes and the dynamic of economic evolution.In fact, the goal of government is complex, and both of "the hand of support"and "the grabbing hand" take effect on economy.This study will discuss how government control influences the mechanism of corporate governance of SOEs with the background of transitional economy in China. Two theories, "the hand of support" and "the grabbing hand", are integrated to analyze three problems, "motivation"→"control right"→"staff control". This research is aimed to further reveal the "black box" of governance structure of state-owned enterprises.The dissertation is arranged as follows:First, it begins with an introduction. The introduction outlines the background, the significances, methodology and paper structure.The Text Part is made up of six chapters.Chapterl:Literature review and theoretical basis. Literature review shows the theoretical foundation of the paper. Then it reviews these literatures on how government control influence company performance from three areas, including the political ties and firm performance, ownership structure and firm performance, government behavior and governance of SOEs.Chapter2:Institutional background. This chapter introduces government incentives and governance process of change, the historical process of state-owned enterprises reform, state assets management system reform, corporate governance reform of SOEs, which shows institutional background of change processes of SOEs since reform and opening up.Chapter3:State-owned enterprises'government control right transfer. This chapter is an empirical research on government motives of control right transfer. Firstly, it analyzes the decisive factors of State-owned enterprises'government control right transfer, revealing the motives of the government. Then, it further studies the performance of SOEs after control right transfer. It discusses whether the SOEs'performance is consistent before and after the event. Finally, based on the previous research, this chapter further discusses the property right reform of SOEs.Chapter4:Government control and firm value. This chapter studies the relationship between government control ratio and firm value through empirical data analysis. Firstly, combined with "the hand of support" and "the grabbing hand" theoretical model, this chapter discusses the positive and negative effect of government control right on firm value. Then, it tests the relationship between government control right and firm value through the comparison of the positive and negative marginal effect of government control right on firm value. Finally, it confirms that whether there is relation between government control right and firm value under different government control systems.Chapter5:Government control, executive administrative experience and firm value. This chapter discusses whether executives with administrative experience and those with business experience have different actions under the control of the government personnel. Three problems are to solve:(1)Are executives with administrative experience harmful or beneficial on the SOEs performance? (2)How executives with administrative experience affect the performance of SOEs? (3)Do executives with administrative experience have different effect on firm value with the background of different government control?Chapter6:This chapter includes the main conclusions, policy implications and research limitations, and prospects for future research.Main Findings in this dissertation are as follows:1. In recent years, political motives of SOEs control right transfer are obvious, while economic motives are not obvious. Government tends to retain large-scale and strategic enterprises. Based on the literature review, this research infers that government motives of SOEs control right transfer may experience three stages: economic motives, coexistence of economic motives and political motives, and political motives.2. Privatization of enterprises improves operating performance effectively, while the ultimate control right still retained in the government does not lead to significant performance improvement.3. Although the privatization has improved the state-owned enterprise's ex-post performance, the government has not shown any tendency to privatize the enterprises with poor performance out of the political concern. It is a difficult dilemma which Chinese government faces in the progress of state-owned enterprises'reform. Moreover, it reveals that government's political motives prevails economic motives.4. Because there is two hands including "hand of support" and "grabbing hand", the "positive" and "negative" effect of the two hands simultaneously make the government control right and company value show "inverted U" relationship. As the local government of greater intensity than the central government's intervention, this "inverted U" relationship is more obvious under the control of the local government.5. Government appoints many government officials as executives of SOEs to strengthen control of the business. Because of promotion channels and divers political goal, these executives often use less ability for the business, thus causing damage to the enterprise value. However, in the context of the local government's strong intervention, there is a certain degree of buffering effect when Chief executives with administrative experience damage to corporate value.This dissertation is an exploratory research. Major improvements and innovations are evident in the following aspects:1. In recent years, political motives are the main motives of property rights reform of state-owned enterprises, while economic motives are not obvious. Based on test of prior (Ex ante) government control over the transfer of motive and after (Ex post) firm performance, it is found that although the privatization has improved the state-owned enterprise's ex-post performance, the government has not shown any tendency to privatize the enterprises with poor performance out of the political concerns. It is a difficult dilemma which Chinese government faces in the progress of state-owned enterprises'reform.2. This research clarifies that the core of government control of state-owned enterprises is control right, expands the previous research horizon. Combined with "the hand of support" and "grabbing hand" theoretical analysis, it is tested that the "inverted U" relationship between the ratio of government control right and corporate value.3. This research fills the vacancy of previous study on executives' government background in SOEs. Based on Fan, Wong and Zhang (2007), this research further discusses why corporate executives with governmental experience have negative effect on firm value and the difference of different government control.